Self-storage real estate investment trusts (REITs) are showing early signs of a turnaround, and Bank of America Securities says three of the biggest players just proved it with better-than-expected third-quarter results and higher guidance.
In a Monday note, the Wall Street research firm said CubeSmart, Extra Space Storage, and Public Storage all topped analyst expectations for the third quarter and raised their forward guidance. The reason: the supply of new storage facilities is finally easing, and occupancy is improving as tenant churn—the rate at which customers move out—declines.
What's driving the improvement?
Self-storage is a business built on steady, recurring rent from people storing furniture, business inventory, or seasonal items. For the past couple of years, the sector has been squeezed by two forces: a wave of new construction that added too many units, and a slowdown in demand as the economy cooled and fewer people moved homes.
That oversupply pushed vacancy rates up and forced operators to offer discounts to fill units. But the picture is shifting. According to Bank of America, new supply is moderating—developers are pulling back on new projects after years of building—and occupancy is ticking higher as fewer existing customers leave.
Lower churn is particularly important for storage operators. When a tenant moves out, the unit sits empty for a period, and the company must spend money on cleaning, marketing, and leasing it to a new customer. Even a small drop in move-outs can meaningfully boost revenue and profit, because the cost of keeping a unit occupied is far lower than the cost of replacing a tenant.
What this means for investors
For everyday investors, the news is a signal that the self-storage sector may be past the worst of its downturn. REITs are companies that own and operate income-producing real estate and are required to distribute most of their taxable income to shareholders as dividends. That makes them popular with investors seeking steady income.
The three companies mentioned—CubeSmart, Extra Space Storage, and Public Storage—are among the largest self-storage REITs in the United States. Their results are often seen as a bellwether for the broader sector, so their improved outlook could bode well for other storage operators and for the commercial real estate market more broadly.
However, analysts caution that the recovery is still early. Demand for storage units is described as "relatively stable" rather than booming, and the supply picture could change if developers resume building. Investors should also remember that REIT performance is tied to interest rates, since higher rates raise borrowing costs and make the dividend yield less attractive compared with bonds.
What to watch next
Investors will be watching whether the improving occupancy trend continues into the fourth quarter and whether other self-storage operators follow with similar guidance raises. They'll also keep an eye on new construction starts, which have been slowing but could pick up if the sector's fortunes improve.
The broader backdrop for REITs has been mixed. While some segments like data centers and industrial properties have benefited from structural demand, others like office and retail have struggled with changing work and shopping habits. Self-storage has historically been one of the more resilient property types, because people tend to keep paying for storage even in tough times—they'd rather cut other expenses than lose access to their belongings.
For those considering an investment in self-storage REITs, the key takeaway is that the sector appears to be stabilizing, but it's not yet a full-blown recovery. As always, it's wise to consider how any single stock fits into a diversified portfolio and to be aware of the risks, including interest rate moves and the possibility that supply could increase again.
Bank of America's note adds to a growing sense that the worst may be over for this niche of the real estate market. But as with any turnaround, the proof will be in the coming quarters.
